Bonds generally are issued at par, or face value. But there\’s a popular category of discount bonds called zero-coupon bonds, which are issued below face value and don\’t make regular interest payments. They\’ve had a turbulent 12 months as the Fed extended its quantitative easing program but gave a more precise sense of when it could end. Pimco\’s own exchange-traded fund, the Pimco 25+ Year Zero Coupon U.S. Treasury Index ETF
, returned 60% in 2011 but ended 2012 with a 1% return. Zero coupon bonds are more sensitive to interest rate changes than other bonds.

Gross, manager of the Total Return Fund
, the world\’s largest bond fund, in early January warned that the monetary easing actions of the Federal Reserve, European Central Bank and Bank of Japan were lining the lairs of \”inflationary dragons\” that will turn bond values to ash. Those worries got fresh fodder on Tuesday when the Bank of Japan said it will adopt an open-ended asset purchase program to stimulate the economy. Read more on the Bank of Japan.

Gross\’ alarm over discount bonds may be an extension of that notion, that the massive amount of monetary stimulus dumped into the global financial system will lead to inflation and a bond selloff. It stands to reason that higher premium bonds will do better than discount, or sub-par, ones.

The Fed for its part is in the market on Tuesday buying bonds, in this case Treasury Inflation Protected Securities, as part of its QE efforts. See New York Fed\’s Open Market schedule. There\’s plenty of potential carnage for those who are looking.

This copy is for your personal, non-commercial use only. Distribution and use of
this material are governed by our
Subscriber Agreement
and by copyright law. For non-personal use or to order multiple copies, please contact Dow Jones
Reprints at 1-800-843-0008 or visit